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The Tyranny of Inequality

  • RAGHURAM G. RAJAN
  • LUIGI ZINGALES

Life is replete with instances where two closely related parties forego mutually advantageous opportunities: peace treaties are not signed, inefficient regulations are not altered, and possibilities for investment are frittered away. Since the parties are in close contact, asymmetric information cannot be an explanation for the failure to agree. The explanation this paper offers is based on the assumption that when two parties interact repeatedly, not all aspects of the relationship are contractible. Each party's property rights in the relationship then become endogenous. Efficiency and distribution are not separable in such a world, leading the parties to forego perfectly contractible opportunities. The inability to cooperate is especially severe when one of the parties has relatively poor production opportunities which may explain why the inefficient have undue sway. We explore a number of applications.

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Paper provided by Center for Research in Security Prices, Graduate School of Business, University of Chicago in its series CRSP working papers with number 423.

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Date of creation: May 1999
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Handle: RePEc:wop:chispw:423
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